Essays on Bank Failures and Regulation, Systemic Risk Measurement Coursework

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The paper "Bank Failures and Regulation, Systemic Risk Measurement" is a great example of a finance and accounting coursework.   There are agreements that exist between academics and responsible specialists which the forthcoming regulatory environment ought to push financial organizations to interiorize the negative externalities which they produce from time to time throughout the economy (Petitjean, 2013). Regulatory reform must specifically address the socially offensive mechanism that allows banks to privatize their gains when things are looking good. The banks also socialize their risks when the ‘ hurricane’ is persisting. Regulatory investment is probable to keep producing costly negative impacts on the whole economy which is due to the multifaceted set of upcoming regulatory constraints.

On the other hand, a banking system which is not governed by any regulations is neither an option. There are various preventive measures such as micro-prudential rules which are meant to focus on minimizing the possibility of any bank failure (Petitjean, 2013). They are undoubtedly unavoidable as a division of a complete regulatory regime and they do face strong disadvantages since a huge division of a bank’ s business is dedicated to exploiting both opportunities and loopholes developed by regulatory advancement. Over-regulation doesn’ t essentially slow down the pace of financial advancement since it accelerates it because financial advancement is intended to circumvent regulation (Petitjean, 2013).

Therefore, extreme risk-taking observed by various banks is considered endogenous towards the regulatory system. By avoiding existing rules, financial organizations tend to take risks which then raises the possibility of a bank failure. Therefore, to react to these issues, there ought to be top priority directed towards regulatory agendas which are aimed at reducing the costs of bank failures by centering their attention at remedial measures.

Intrinsically, the global-wide cost of bank failures is probable to be enormous when they accrue (Petitjean, 2013). According to the Basle I and II micro-prudential measures, the amount of risk is constantly poorly set since regulators depend much on this type of rule-based approach (Petitjean, 2013). Therefore, regulatory efforts performed in order to avoid any form of bank failure by outlining the quantity of capital needed to conceal risks are regrettable but at the same time traded by financial organizations. On the other hand, the Basel III approach needed banks to sustain a minimum of “ equity-to-assets” ratio.

All the high equity, as well as capital ratios, are below the Basel III (Petitjean, 2013). Theoretically, a consequent increase in the ratios result to a subsequent decrease in the possibility of bank failures and at the same time minimizes on the failures that do tend to accrue. Therefore, in order for banks to focus on minimizing their losses, they should focus on the following criteria: additional capital charge for G-SIB’ s, liquidity ratios and leverage ratios (Petitjean, 2013). The concept of ring-fencing regulation is aimed at limiting the allowable size in terms of business of significant financial organizations that would require to be bailed out in an event of a systemic catastrophe.

For instance, the Glass-Steagall Act is a perfect example of such regulations that protect commercial banks from being affected by different risks found in various banking activities such as “ casino-type” (Petitjean, 2013). On the other hand, top priority should be placed to in the regulator’ s agenda which will address any existing socially undesirable mechanism that allows banks to privatize their gains especially when the times are good.

As we all know, banks are determined by competition, profitability as well as innovation. Hence, these three powerful operations shouldn’ t be suppressed in any case.

References

Dionne, G. 2010, The Foundations of Risk Regulation for Banks: A Review of the Literature, retrieved from http://www.banqueducanada.ca/wp-content/uploads/2010/09/foundations.pdf

Petitjean, M 2013,"Bank failures and regulation: a critical review", Journal of Financial Regulation and Compliance, Vol. 21, Issue. 1, pp. 16 - 38

Watts, G 2014, Business Failure without Bankruptcy Rules, Law Update, Retrieved From www.tamimi.com/en/magazine/law-update/section-8/october-4/insolvency-in-the-uae-business-failure-without-bankruptcy-rules.html

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